What is a corrective tax?

Understand the Problem

The question is asking for a definition and explanation of what a corrective tax is, which typically refers to a tax imposed on activities that generate negative externalities in order to correct market outcomes.

Answer

A tax imposed on activities generating negative externalities to reflect their social marginal cost.

A corrective tax is a tax levied on activities that generate negative externalities, with the aim of making the private cost of these activities reflect their social marginal cost. This encourages private decision-makers to take into account the social costs their activities impose on society.

Answer for screen readers

A corrective tax is a tax levied on activities that generate negative externalities, with the aim of making the private cost of these activities reflect their social marginal cost. This encourages private decision-makers to take into account the social costs their activities impose on society.

More Information

Corrective taxes are also known as Pigouvian taxes, named after the economist Arthur Pigou.

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